A balance sheet projection, also called a balance sheet forecast, is a guide to a business’s financial situation in the future. The forecasts are based on the current balance sheet. A balance sheet projection looks at assets, liabilities, and equity. Then, it works out three others: cash flow, solvency, and liquidity.
A balance sheet forecast helps business owners and finance teams to make better decisions. A company’s growth plans, investments, and headcount are determined by how healthy the financials are. Without a balance sheet forecast, a business risks making unsustainable changes it can’t afford in the long term.
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Why are balance sheet projections important?
A balance sheet forecast gives businesses an assessment of scaling up, managing operations, and investing in new technologies without overspending. If the fiscal year isn't going well, the balance sheet forecast gives the FP&A team a chance to correct course and put in place cutbacks to get profitability back on track.
Here’s an example: you want to increase headcount by 10% in the next year, but your projected cash flow isn’t looking too hot. Your business’ liabilities have also gone up. It might be best to put those plans on ice until the company is in a better financial position. You’ll only know this impact by completing a balance sheet forecast.
Alternate example: you had a bumpier year in sales and your balance sheet projections look healthy, but the global economic situation isn’t great. Now might be the time to put away retained earnings to weather the storm.
If you’re looking to take on new funding, balance sheet projections help communicate with potential investors. You can instill confidence in your stakeholders by demonstrating an excellent financial track record, with projections to prove it.
Balance sheet projections are valuable tools, but no forward projection is perfect. You’ll need to look out for any inaccuracies in the figures, potential risks in the business that could affect the financials, and how it compares to the previous year’s financial performances.
A projection is only as good as the data inputted into it. If there are flaws in the current balance sheets, or they haven’t changed in a while, your projections will not truly reflect your financials. Check your data integrity and adjust the models for your projections if it looks off.
While you can’t predict every future risk that might affect your business, you’ll know whether anything on the immediate horizon might impact your balance sheet projections. If you haven't already, you should factor any red flags into your estimations.
Lastly, if you haven’t greatly changed the business, you can compare your current projections to previous fiscal years. Do they seem accurate? Is there a significant loss or surplus in the estimates you can’t account for?
Looking back at records can give you a more precise picture of the future.
If you want the most accurate forecasting for your business, then your modeling needs to be effective.These best practices will set you up for success and give your projections a good start.
Context is vital for financials. You need at least two years’ worth of historical data, like cash flow statements, to forecast a balance sheet. The more data you give it to analyze, the more accurate the reporting will be.
There’s such a thing as optimizing your data for financial forecasting. While Generally Accepted Accounting Principles (GAAP) are for financial statements, your data might be better suited to different categories for your balance sheet projections so that they’re better reflected in the forecasts.
For example, separating and reclassifying long-term debt to short-term debt if a company expects to pay it off in the next year gives a more accurate picture for forecasting.
Use supporting schedules
Sometimes, your balance sheet forecasting needs a little help. The supplemental information from supporting schedules means your projections can give more insight into the company’s future financial performance.
An example of a supporting schedule could be detailed on a business's debt. You could include information on the interest rates, repayments, and when the debt finishes so the modeling can factor this data into the projections.
Now that you know some best practices with balance sheet forecasts, how do you get started?
Forecasting the balance sheet means working out the business’s future financial position—its assets, liabilities, and equity. Each business’s incoming and outgoing finances are unique: look at any planned divestment, acquisitions, or investments on the horizon. You’ll also need to be mindful of the economic climate and any business operations that could affect your company’s financials.
A typical balance sheet forecast spans 12 months, but your forecast period can be any time you need. Below, we’ve outlined some core considerations for getting your balance sheet projections up to scratch.
Forecasting cash flow
To run a successful company, you want to know if you're running short on money or doing well. Accurate cash flow forecasts are vital for the rest of your balance sheet projections. You'll need to use income statement line items to forecast cash flow and predict what sales will look like, plus any short-term expenses you might need to cover.
Working capital
The best way to start is by forecasting the net working capital, a short-term measure of a company’s financial health. In its simplest form, you’re subtracting the current liabilities from the current assets.
Some working capital may also be sensitive to global market trends and changes to business operations. For example, if your company relies on importing goods and there’s a geopolitical issue in the region you buy from, your business’s working capital could go up or down.
Assets can include:
Liabilities could look like:
The working capital roll-forward takes your net working capital and tracks how it changes over time. Essentially, a roll-forward monitors the movement of current assets and liabilities across accounting periods to give you a clear view of your short-term liquidity. It’s a shrewd tool for financial planning and analysis (FP&A) as it ensures your balance sheet projection reflects actual cash flow and working capital trends.
To find the change in working capital, start with the beginning working capital, add changes in assets, and then subtract liabilities. The formula is relatively simple:
Ending working capital = Beginning working capital + changes in current assets - changes in current liabilities
Balance sheet software will automate working capital roll-forwards to save you time and cut out errors. With reliable insights into your short-term financial health, you can prepare for loans and acquisitions or optimize your cash flow confidently.
Long-term fixed assets like machinery and equipment count as property, plant, and equipment (PP&E). Intangible assets concern patents, trademarks, and copyrights. The more revenue a company generates, the more PP&E and intangible assets it usually has.
These assets typically last for years, but their value needs to be forecasted yearly due to depreciation. This can make predictions tricky at times, but you can use roll-forward calculations for both to determine the change in any value.
Goodwill is a specialist intangible asset class that comes into play when companies are acquired. It reflects a company’s financial standing with customers, suppliers, investors, or stakeholders. Unless you’re on a spending spree, it rarely comes into play, but it is still good to have on your projected balance sheet.
In accounting, debt is treated differently because it accrues interest expense, whereas liabilities do not. Long-term debt projections are calculated using the opening balance as a starting point, then adding any interest and subtracting repayments.
It’s worth including some disclosure on when the debt is set to be paid off, even if a company plans on borrowing more in the future. This is because it's assumed that companies are continuously paying off and refinancing debts to maintain a healthy capital structure.
Equities and retained earnings
Once you’ve subtracted the liabilities from the assets, you’re left with the equity. This can include a few different equity types, including shareholder capital, new stock issuance, and common stock.
Stock-based compensation for employees and treasury stock, which is stock repurchased from shareholders, are treated as reductions in equity.
Retained earnings also fall under this category. This is the company’s income that isn’t distributed amongst its shareholders; instead, it's kept aside for lowering debt or reinvesting into the business. It’s a good indicator of how well a company is doing: the more retained earnings it has, the less it needs to rely on outside investment.
Other comprehensive income (OCI) is anything that can’t count as net income but still needs a place on the balance sheet. This can include items like foreign currency adjustments, or unrealized gains or losses on investments and pension plans.
A retained earnings roll-forward tracks how a company’s accumulated profits change over time. CFOs can use it to measure their financial stability and reinvestment capacity. Balance sheet software simplifies the calculation by pulling your beginning retained earnings, net income, and dividends paid from your FP&A software in real time.
Start with your retained earnings at the beginning of the period you want to study. Add net income over the period and subtract dividends paid to give you the ending retained earnings.
These two items go hand in hand, as short-term debt can compensate for any projected cash flow shortfall. To accurately forecast short-term debt, use the cash flow statement projections as a starting point. This will reveal any potential upcoming cash deficits or surpluses. If there’s a cash deficit, short-term debt can fill this gap.
No additional borrowing is needed if the company is projected to be flush with cash to compensate for any cash flow projection shortfall.
A few items in your balance sheet projections may not fit into the other categories. They still need to fit somewhere in the forecasts to get an accurate sense of your company’s financial health.
Deferred taxes are the future tax consequences of events that have already been accounted for in a business’s financial statements. Tax assets could include deductions yet to be realized, typically tied to revenue projections. Tax liabilities are upcoming tax payments, which typically tie into operations.
Some items don’t have any particular category but must be included in balance sheet forecasts. These could be land holdings or leases, long-term debt, or pension liabilities.
The right balance sheet software draws up accurate balance sheet projections with almost zero effort. At the click of a button, they pull in information from a range of data points, automate calculations, and provide ongoing insights to keep your forecasts on point.
Here are some of the top balance sheet projection solutions on the market today.
Cube is an AI-powered, cloud-based FP&A software that simplifies balance sheet projections and financial forecasting. It integrates seamlessly with spreadsheets and accounting platforms, pulling historical data on fixed assets, working capital, cash flow, and tax information to automate accurate balance sheet calculations. Users start with premade, compliant balance sheet templates that get you started immediately without spending time building financial models. This reduces manual data entry and errors so you can make more informed decisions about your assets, liabilities, and equity.
Key features:
Pricing: Cube scales to meet the specific needs of each client, so you only pay for the features you enjoy.
Book a free demo with the Cube team to customize a platform where you can launch balance sheet projections and much more—without the busy work.
QuickBooks is an accounting software solution for small to mid-sized businesses with features for balance sheet projections and financial planning. It automates financial tracking and reporting while integrating with bank accounts and other financial planning apps like Cube to keep accurate records of assets, liabilities, and equity. It updates with changes in tax and accounting laws so you can create balance sheet forecasts while staying compliant with accounting standards.
Key features:
Pricing: Quickbooks has a range of plans that increase in complexity and users as you grow.
See our full comparison of NetSuite vs QuickBooks
Sage Intacct is a cloud-based financial management solution that supports long-term financial planning and balance sheet projections. It integrates with other accounting and ERP tools, making it easier to consolidate financial data. With built-in automation and reporting capabilities, you can use it to compare assets, liabilities, and equity over time to get roll-forward data and extrapolate it into forecasts.
Key features:
Pricing: Sage Intacct customizes pricing based on business size, users, and feature requirements.
Zoho Books helps businesses manage balance sheet projections and financial planning with automated bookkeeping, real-time reporting, and bank integrations. Track assets, liabilities, and equity before collecting insights and planning with financial analytics and forecasting tools. Zoho Books has a wide range of tiers so businesses of different sizes can project future financial positions and make data-driven decisions.
Key features:
Pricing: Zoho Books offers tiered pricing plans, including:
FreshBooks is aimed at small businesses and freelancers who want to simplify their financial management. Automated expense tracking, invoicing, and reporting gather an accurate record of assets, liabilities, and equity. Forecasting tools allow you to create reliable balance sheet projections to plan for growth and manage cash flow.
Key features:
Pricing: FreshBooks offers pricing packages for freelancers, self-employed users, and businesses with contractors. Businesses with employees need to reach out for a customized package.
Xero is an accounting and bookkeeping platform that allows you to manage balance sheet projections with real-time financial tracking and automation. It integrates with major banks, ERP systems, and financial planning apps to glean diverse data points. Automated record-keeping and customizable reporting tools provide insights into assets, liabilities, and equity.
Key features:
Pricing: Xero offers three different pricing tiers:
Now that you’ve sorted the projections, you need to make sure everything matches up, also known as balancing the model. Balance sheet forecasting fundamentals involve assets, liabilities, and equities. If everything is worked out correctly, the liabilities subtracted from the assets should add up to the remaining equity in the company.
But as you’ll now know, it’s never that straightforward. This can lead to the model needing rebalancing to account for any errors. Thankfully, careful editing can address any anomalies and bring your balance sheet back into harmony.
Once you’ve balanced the balance sheet forecast, you can continually update the model if the company’s financial situation changes. This way, you’ll stay on top of your financial projections and be able to make informed business decisions.
Download this free balance sheet template to get started
Let’s run through a very simple example of what a forecasted balance sheet looks like.
|
Current year |
Next year |
|
|
Assets |
||
|
Cash |
$100,000 |
$120,000 |
|
Accounts receivable |
$50,000 |
$60,000 |
|
Inventory |
$20,000 |
$25,000 |
|
Intangible assets |
$30,000 |
$40,000 |
|
TOTAL |
$200,000 |
$245,000 |
|
Liabilities |
||
|
Accounts payable |
$35,000 |
$50,000 |
|
Long-term debt |
$15,000 |
$25,000 |
|
TOTAL |
$50,000 |
$75,000 |
|
Equity |
||
|
Shareholder capital |
$100,000 |
$110,000 |
|
Retained earnings |
$50,000 |
$60,000 |
|
TOTAL |
$150,000 |
$170,000 |
Each time, the equity is the number of liabilities minus the assets. Your financial model will have more complex needs, but this example shows the core principles of balance sheet projections.
If your figures aren’t adding up, check the next section for tips on fixing your forecasts.
Now you know how to create a balance sheet projection. You also learned why balance sheet forecasting is vital and how it can help you create more accurate financial models.
If you're like the 92% of FP&A teams that use Excel, then you should check out Cube. Cube handles all the manual labor of organizing, checking, and cleansing your source system data. Plus, it makes it easy to pull it into Excel.
Request a demo to learn more.